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ABSTRACT
In recent years, the economic determinants of international currency status have attracted growing attention among economists. But what about the political determinants? This paper proposes a framework or taxonomy for thinking about this question. It identifies two distinct channels – one indirect and one direct – through which politics can influence the international standing of a currency. In the former category, politics is important through its impact on three key economic determinants of international currencies: confidence, liquidity, and transactional networks. In the latter category, politics matters more directly when a currency's international status is supported by states for reasons unrelated to these economic determinants. The paper explores briefly how these two channels of political influence might influence the dollar's future as an international currency. This exploration is not designed to provide a new definitive answer to the question of the dollar's future, but rather the goal is to highlight the various ways that political scientists can widen analyses of this topic.
ACKNOWLEDGEMENTS
Special thanks for their helpful comments to the four anonymous reviewers of this journal as well as to Jerry Cohen, Jonathan Kirshner, Chris Way, Hubert Zimmerman, and all the other participants in the Cornell workshops on ‘The Future of the US Dollar’. For their research help and support, I thank Troy Lundblad and the Social Sciences and Humanities Research Council of Canada.
Notes
1 In the important CitationAndrews (2006) volume, for example, the only chapter that focuses primarily on this issue is Andrew Walter's and he is concerned only with what I call in this paper the ‘indirect’ role of politics.
2 For surveys of recent writing about the economic determinants of international currencies, see Cohen (1998, 2004) and CitationLim (2006). This recent literature builds on earlier economic writings around the time of collapse of the Bretton Woods exchange rate system (e.g. CitationCohen, 1971; CitationKindleberger, 1967; CitationSwodoba, 1969).
3 For the latter, see especially CitationMcKinnon (2005).
4 For an innovative study of the politics of clearing and payments systems, see Jeffs (forthcoming). The issue of the importance of these systems has also been raised in East Asia among those who are encouraging the region to reduce its dependence on the US dollar via the creation of the creation of an Asian Currency Unit (CitationEichengreen, 2007).
5 Strange also introduced one further distinction – ‘Neutral’ currencies – to describe a currency such as Swiss Franc which, like a Top currency, achieved its international standing because of its economic attractiveness, but which was not issued by a dominant economic power.
6 This definition of the term is perhaps a little wider than Strange herself intended, but I think it usefully includes a set of circumstances which do not otherwise fall easily into her categories. I am suggesting that a Negotiated currency's international position relies on the voluntary support of foreign states (in contrast to a Master currency) and that this support stems from reasons beyond the inherent economic attractiveness of the currency (in contrast to a Top currency).
7 I am very grateful to Benjamin Cohen for suggesting the line of argument in this paragraph.
8 The category of Master currency is much less relevant for the dollar today than it was for sterling.
9 Dooley and Garber (2005) also develop an argument that dollar reserves are being accumulated by foreign governments such as China's as a kind of collateral to encourage foreign private investment in the country. As Eichengreen (2005b) notes, however, there is little evidence for this thesis and it also does not apply well to large dollar holders such as Japan or South Korea where there is no real risk of expropriation of foreign assets.
10 Murphy (2006) explicitly links Japan's dollar support in the current period to the country's broader geopolitical dependence on the US.
11 Shih and Steinberg (2007) provide one recent exception with their attempt to develop statistical indicators of the determinants of reserve holdings in 2000–2005. They find some support for the Bretton Woods 2 thesis, but precision of some of the indicators employed might be questioned by critics of that thesis.
12 They also argue that the two largest dollar holders – China and Japan – are less concerned about the potentially inflationary consequences of holding such large reserves than dollar holders in the past. When US allies accumulated dollar reserves to stem dollar depreciation in episodes such as the late 1960s, late 1970s or the late 1980s, it often proved difficult to sterilize this currency intervention, with the result that the dollar purchases were soon curtailed in an effort to prevent domestic inflation. In the current context, however, Dooley and Garber argue that Japanese authorities have seen currency intervention as a way to help reverse the domestic deflationary pressures Japan has experienced for over a decade, while Chinese authorities are better able to contain inflationary pressure because of the heavily regulated nature of the Chinese financial system (CitationDooley and Garber, 2005: 159). The latter argument is challenged by many, e.g. CitationGoldstein and Lardy (2005), CitationEichengreen (2005a), CitationRoubini and Setser (2005).
13 Even in this context, CitationEichengreen (2005b) notes that collective action problems eventually undermined cooperation among dollar supporters.
14 Using the size of China's reserves at the end of 2004, Goldstein and Lardy (2005: 9) note that a 15% depreciation of the dollar against the renminbi would cause financial loss to China that are equivalent to 6% of China's GDP. The number is even higher today given the rapid growth in the size of its reserves.
15 Gray (2004) highlights the importance to the US dollar's standing of the US acting as the key locomotive boosting world aggregate demand.
16 Some think China's export dependence would preclude this, but Goldstein and Lardy (2005: 4) note that the US takes only one-third of Chinese exports at this point (Europe's share is roughly a quarter).
17 Strange's later writings (e.g. CitationStrange, 1987) about the ‘structural’ power of dominant states in the international monetary system acknowledged the significance of the ‘indirect’ channel of political influence more effectively. For an overview, see CitationHelleiner (2006).